Creating the great business

leaders
TIME VALUE OF MONEY

Team Teaching
Finance Management
2021
 Fakultas Ekonomi dan Bisnis
School of Economic and Business CLO
Telkom University

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 Fakultas Ekonomi dan Bisnis
School of Economic and Business Learning Objectives
Telkom University
LO Description Topic

LO 1 Explain the mechanics of compounding and bringing Compound Interest, Future

the value of money back to the present. Value,
and Present Value
LO 2 Understand annuities. Annuities
LO 3 Determine the future or present value of a sum when Making Interest Rates
there are nonannual compounding periods. Comparable
LO 4 Determine the present value of an uneven stream of The Present Value of an Uneven
payments and understand perpetuities. Stream and Perpetuities

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 Fakultas Ekonomi dan Bisnis
School of Economic and Business

Telkom University
Time Value of Money, or TVM, is a concept that is used in all aspects of
finance including:
● Bond valuation
● Stock valuation
● Accept/reject decisions for project management
● Etc.

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 Fakultas Ekonomi dan Bisnis
School of Economic and Business Time Lines
Telkom University

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 Fakultas Ekonomi dan Bisnis
School of Economic and Business Generap Assumption
Telkom University
▪ Cash Flows (CFs) occur at the END of the period, unless stated
otherwise.
▪ Payments (PMTs) occur at the END of the period (ordinary annuity),
unless stated otherwise (annuity due).

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 Fakultas Ekonomi dan Bisnis
School of Economic and Business

Telkom University
Translate $1 today into its equivalent in the future (compounding).

Today Future

?
Translate $1 in the future into its equivalent today (discounting).

Today Future

?
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 Fakultas Ekonomi dan Bisnis
School of Economic and Business Compound Interest, Future Value, and Present Value
Telkom University
■ Compound interest the situation in which interest paid on an
investment during the first period is added to the principal. During the
second period, interest is earned on the original principal plus the
interest earned during the first period.
■ Future value the amount to which your investment will grow, or a
future dollar amount.
■ Present value the value in today’s dollars of a future payment
discounted back to present at the required rate of return.

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 Fakultas Ekonomi dan Bisnis
School of Economic and Business Time Value of Money Concept
Telkom University
1. Future Value Single Amount
2. Present Value Single Amount
3. Future Value Annuity
4. Present Value Annuity

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 Fakultas Ekonomi dan Bisnis
School of Economic and Business Future Value Single Amount
Telkom University
a. FV Single Amount & Compounded Annually

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 Fakultas Ekonomi dan Bisnis
School of Economic and Business Future Value Single Amount
Telkom University
Example:
■ Jane place $100 in a savings account that pays 6 percent interest,
compounded annually. She wants to know how much money will be in
the account at the end of 3 years.

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 Fakultas Ekonomi dan Bisnis
School of Economic and Business Future Value Single Amount
Telkom University
b. Future Value Single Amount & A Non Annually Compound Interest

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 Fakultas Ekonomi dan Bisnis
School of Economic and Business Future Value Single Amount
Telkom University
Example:
■ Suppose that in our previous example interest were paid quarterly and
that we wished again to know the terminal value at the end of 3 years.

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 Fakultas Ekonomi dan Bisnis
School of Economic and Business Future Value Single Amount
Telkom University
c. Future Value Single Amount with Continuous Compounding

e = 2,71828182845904

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 Fakultas Ekonomi dan Bisnis
School of Economic and Business Future Value Single Amount
Telkom University
Example:
■ Suppose that in our previous example, the terminal value at the end of
3 years

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 Fakultas Ekonomi dan Bisnis
School of Economic and Business Present Value Single Amount
Telkom University
Present Value Single Amount

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 Fakultas Ekonomi dan Bisnis
School of Economic and Business Present Value Single Amount
Telkom University
Example
■ Rose wishes to find the present value of $1,700 that she will receive 8
years from now. Rose’s interest rate is 8%.

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 Fakultas Ekonomi dan Bisnis
School of Economic and Business Annuities
Telkom University
■ Annuity a series of equal dollar payments made for a specified number
of years.
■ Ordinary annuity an annuity in which the cash flows occur at the end
of each period.
■ Annuity due an annuity for which the cash flow occurs at the
beginning of each period.
■ Compound annuity depositing an equal sum of money at the end of
each year for a certain number of years and allowing it to grow.

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 Fakultas Ekonomi dan Bisnis
School of Economic and Business Future Value Anuity
Telkom University

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 Fakultas Ekonomi dan Bisnis
School of Economic and Business Future Value Anuity
Telkom University
Example
■ If we know that we need $10,000 for college in 8 years, how much
must we deposit in the bank at the end of each year at 6 percent
interest to have the college money ready?

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 Fakultas Ekonomi dan Bisnis
School of Economic and Business Present Value Annuity
Telkom University

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 Fakultas Ekonomi dan Bisnis
School of Economic and Business Present Value Annuity
Telkom University
■ Example:
■ Braden Company, a small producer of toys, wants to determine the
most it should pay to purchase a particular ordinary annuity. The
annuity consists of cash flows of $700 at the end of each year for 5
years. The firm requires the annuity to provide a minimum return of
8%.

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 Fakultas Ekonomi dan Bisnis
School of Economic and Business

Telkom University
■ Future Value of an annuity due

■ Present Value of an annuity due

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 Fakultas Ekonomi dan Bisnis
School of Economic and Business Amortized Loan
Telkom University
■ Amortized loan a loan that is paid off in equal periodic payments.

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 Fakultas Ekonomi dan Bisnis
School of Economic and Business Amortized Loan
Telkom University
Example:
■ Suppose you borrow $22,000 at 12% to be repaid over the next 6
years. Equal instalment payments are required at the end of each year,
and these payments must be sufficient in amount to repay the $22,000
together with providing the lender a 12 percent return.

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 Fakultas Ekonomi dan Bisnis
School of Economic and Business Making Interest Rates Comparable
Telkom University
■ Annual percentage rate (APR) the interest rate that indicates the
amount of interest paid or earned in 1 year without compounding.
Annual Percentage Rate (APR) = Interest rate per period x Compounding periods per year (m)

■ Effective annual rate (EAR) the annual compound rate that produces
the same return as the nominal, or quoted, rate when money is
compounded on a nonannual basis. In effect, the EAR provides the
true rate of return.

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 Fakultas Ekonomi dan Bisnis
School of Economic and Business

Telkom University
Example:
■ You’ve just received your first credit card and the problem is the rate. It
looks pretty high to you. The quoted rate, or APR, is 21.7 percent, and
when you look closer, you notice that the interest is compounded
daily. What’s the EAR, or effective annual rate, on your credit card?

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 Fakultas Ekonomi dan Bisnis Finding present and Future Values With nonannual
School of Economic and Business
periods
Telkom University

Where:
FVn = the future value of the investment at the end of n years
n = the number of years during which the compounding occurs
APR = annual percentage rate
PV = the present value or original amount invested at the beginning of the first year
M = the number of times compounding occurs during the year

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 Fakultas Ekonomi dan Bisnis
School of Economic and Business

Telkom University
Example:
■ If we place $100 in a savings account with an APR of 12 percent
compounded quarterly, what will our investment grow to at the end of
5 years?

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 Fakultas Ekonomi dan Bisnis
School of Economic and Business The Present Value of an Uneven Stream and Perpetuities
Telkom University
■

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 Fakultas Ekonomi dan Bisnis
School of Economic and Business

Telkom University
Example:
■ What is the present value of a $500 perpetuity discounted back to the
present at 8 percent?

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Fakultas Ekonomi dan Bisnis
School Economics and Business

TERIMA KASIH….

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